Bond investors expect sharp rise in interest rates from April monetary policy meeting

• Bid at least 5-6 percentage  points above the yields offered by CB at Tuesday’s bond auction 
• They  expect at least 100 bps or more rate hike on monetary policy meeting scheduled on April 6

Sri Lanka’s bond investors are expecting a sharp increase in interest rates as they seek real returns, which can beat inflation. 

The Monetary Board is likely to deliver another 100 basis points or more rate hike at the upcoming policy meeting scheduled for April 6 to fend off hotter prices.

In a series of signals sent by bond investors in the recent weeks of their expectations, they bid at least five to six percentage points above the yields offered by the Central Bank at Tuesday’s bond auction to raise Rs.45 billion via two tenors. 

However, the Central Bank rejected all bids received in the two bonds maturing on March 15, 2025 and May 01, 2029 as they were significantly above of what they hoped for. 

The two-year bond was offered at 10.25 percent coupon, while the seven-year bond was offered at 13.0 percent coupon. Market sources said investors bid above 15 percent for the two-year bond and over 16.5 percent for the seven-year bond. 

Colombo inflation was at 15.1 percent in February 2022, a fresh 13-year high, and it is set to shoot up to even above 20 percent in March due to the combined effects of the rupee float and the higher global energy prices caused due to the ongoing Russia-Ukraine conflict. 

However the true inflation is believed to be at 55 percent in the year through March 24 when measured considering the massive opportunity cost of staying in queues and other numerous costs one has to incur when pumping fuel, purchasing cooking gas or milk powder. 

But the Rajapaksa administration is unfortunately oblivious of the extent of the crisis while the Finance Minister is running away from the true problems the people face, as he has for over three months avoided parliament. 

Meanwhile, people are calling for the resignation of Central Bank Governor Ajith Nivard Cabraal who bungled the rupee float as the value of the currency since March 7 has fallen by 50 percent in the formal market while the kerb market rates are said to have been created in the north of 350 to 360 to a dollar. 

The Central Bank last week warned of a crackdown of informal moneychangers, but such warnings made earlier didn’t bring desired results. 

The Central Bank has already delivered 150 basis points increase in key policy rates this year, bringing the overnight lending rate to 7.50 percent, but it still has room for arbitrage. 

Meanwhile, the United States Federal Reserve has indicated it would be more aggressive in future interest rates hikes and the markets are now betting a 50 basis point hike in its next meeting in May instead of 25 basis points, to tame inflation, which hit a 40-year high of 7.9 percent in February.

Faster rise in US Fed funds rate could tighten the external conditions further in emerging and frontier markets such as Sri Lanka, as investors tend to pull out funds back into the US for investments.